The last time I had a substantial blog on Sabana REIT was in October 2015. It was titled "Sabana REIT: What is a fair price and what could they do?"Actually, I thought I would never have another substantial blog on the REIT again but a rights issue happened. Never say never, as the saying goes. Despite all the bad stuff that we have heard about Sabana REIT and, yes, I contributed to the noise too, it is reasonable to think that all investments are good at the right price. I try to keep an open mind (and hope that not too much rubbish gets in).Anyway, it is no secret that Sabana REIT was, once upon a time, a very big investment in my portfolio. It was one of my big 5 investments in S-REITs. When I first invested in the REIT, it was in the pink of health and not ailing like it is today. I didn't get in at its IPO because it was priced at $1.05 a unit and its NAV was 99c a unit. I got in a few months later at 11% lower than its IPO price which meant I got in at a discount to NAV and also with a higher distribution yield of about 9.3%. Gearing was a conservative 26.5%. (See related post #1 at the end of this blog.)I was, honestly, waiting for a chance to accumulate Sabana REIT on further weakness as the numbers were good. That chance came a few months later in the form of the Fiscal Cliff in the USA. I increased my investment in the REIT, paying 88c and lower per unit which meant getting a higher distribution yield and an even bigger discount to NAV. (See related post #2 at the end of this blog.) This was in 2011.

Two years later, I remember UOB KayHian was particularly bullish in 2013 and had a target price of $1.30 for Sabana REIT. By that time, I had turned cautious although I was enjoying a distribution yield on cost of between 10.3% to 11.1%. In fact, at that time, I said this:

(See related post #3)

Months after they bought a half empty building, I reduced my stake in Sabana REIT. This was in late 2013. I was channeling funds into Croesus Retail Trust instead. (See related post #4 at the end of this blog.)

In the next 6 months after that, I reduced my investment in Sabana REIT by more than 90%. Innotek Limited was going to divest 15 million units. Gearing level had shot up. DPU had declined. Interest cover ratio had declined. These were things that set alarm bells ringing in my head and I published a blog listing a total of 7 weaknesses and uncertainties in Sabana REIT. (See related post #5 at the end of this blog.)
Sabana REIT's condition got worse over time and its unit price drifted lower and lower. It was like watching a patient in a hospice wasting away.As I did not overpay for my investment in Sabana REIT, I enjoyed a double digit distribution yield for about 3 years. I also enjoyed a decent capital gain of about 11% on the units which I sold. Less than 10% of my original investment remained and it was practically free of cost and still generating an income for me (although a shrinking one). So, you can imagine why I was pretty ZEN when the REIT announced the recent rights issue.42 rights units for every 100 existing units and at 25.8c per rights unit. That sounds OK, I thought.

Of course, for many other shareholders, it wasn't OK. That was the straw that broke the camel's back for them but that is another story for someone else to tell. (See link to the article in The Straits Times at the end of this blog.)I took up my entitlement and also applied for excess rights. I figured that, post rights issue and the proposed acquisitions, the REIT would probably be able to offer a DPU of around 3.5c. At 25.8c per unit, that is a distribution yield of 13.5%. Pretty attractive.However, things will get even more challenging for REITs from here on with interest rates expected to rise further. Industrial REITs here are facing an oversupply of space and a malaise in demand. That Sabana REIT is arguably the weakest performing industrial S-REIT does not inspire confidence.

It is natural to wonder if Sabana REIT could see a big decline in DPU again this year, dilution from rights issue not withstanding. This is, of course, speculative but assuming a decline of about 30% in rental income in the next year or two which is plenty, we could be looking at a DPU of 2.5c then. This does not even consider the increase in finance expense from expected hikes in interest rate.Given this possibly next to worst case scenario, I was not interested in increasing exposure even at 34c a unit when the REIT saw its unit price plunged upon going XR.However, at 25.8c a unit, a reduced DPU of 2.5c would translate into a yield of about 9.7%. Good enough? I think so.At 25.8c a unit, I believe, there is probably sufficient margin of safety to increase my investment in Sabana REIT. I also listened to the more cynical side of me which believed that the rights were probably priced at a level at which the sponsor would not lose money.
Conditions have to be extremely depressing and the management must be more incompetent than incompetent for investors (and the sponsor) to lose money at 25.8c a unit, all else remaining equal.

In terms of value, as a percentage of my total investment portfolio, post rights issue, Sabana REIT remains relatively small at less than 2%, a far cry from the days when it was as big an investment as AIMS AMP Capital Industrial REIT which accounts for about 20% of my investment portfolio today. When we contrast Sabana REIT against AIMS AMP Capital Industrial REIT, the difference in performance is stark. (If you are unfamiliar with AIMS AMP Capital Industrial REIT, see my recent update: here.)With money made in the past and a significantly smaller exposure even after the recent rights issue, it becomes easier to understand why I am not losing sleep over Sabana REIT's terrible performance.When I was added recently to a Facebook group made up of shareholders who want to remove Sabana REIT's manager, I could feel their anger and pain. Beyond the buzz, however, it would be good to learn something from this. Hence, this blog.

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comments:

Sabana REIT has reported a DPU of of 0.88 Singapore cents for its 4Q 2016, a fall of 32.8% year-on-year from the 1.31 cents reported in the corresponding period of the previous financial year.

Gross revenue and net property income (NPI) for the quarter came in 8.2% and 14.7% lower year-on-year at SGD22.5 million (USD15.8 million) and SGD13.9 million respectively, while distributable income fell by 16.1% to SGD9.2 million.

Sabana REIT’s total portfolio occupancy for the quarter was at 87.2% with a portfolio weighted average lease to expiry (WALE) of 2.7 years.

During the quarter, Sabana REIT’s aggregate leverage increased from 41.5% to approximately 43.2% mainly due to year-end revaluation loss on investment properties.

The REIT has however said that it expects the gearing to fall by 3.2% to approximately 40.0%, upon successful completion of its rights issue in January 2017.

Eric Goh: I personally feel the shariah compliant is restricting the reit from casting their net wider to attract various tenants

AK:Their numbers were good at IPO despite being Shariah compliant. For the REIT to perform so badly over time, it is down to the management. Another REIT's CEO told me that they were approached by AMD to buy the building in Chai Chee but declined when they found it would be only 50% occupied. He was surprised that Sabana REIT bought it later.

Remember, the REIT manager is a business entity. If the REIT's unitholders wish to internalise the manager, there is a price to pay. For Croesus Retail Trust, it cost $50 million. How much would it cost for Sabana REIT? If we have lost faith in the REIT manager, best to kick them out and pay someone else to run the REIT. If this is too difficult, then, liquidate. Shut it down.

"They are simply toeing the line. They are taking money legally mah. It is just like insurance agents selling products which are not in best interest of clients. Doesn't mean it is illegal mah. Bad Sabana! Bad Sabana!"

Yee Kan Koh:I will talk to the Manager next week. I might want to propose the following actions by the Manager. Is it sufficient for you to avoid an all out fight to remove the Manager? (Please only unit holders to vote)(1) The Manager needs the approval of the unit holders for any significant purchases and sales of properties (eg 3% of the portfolio per year?)(2) The management fees of the Manager are tied to the performance of the average share price for the past 3 months.

AK:It is silly to tie remuneration to the movement of share price. Remuneration should reflect whether value has been created for shareholders. If value is created, share price will follow.

"Leopards cannot change their spots. I have very little hope that Sabana REIT's current manager will change theirs. If this is the last straw, we should have a new manager ready to take over and we must promise this new manager that we will remove the current manager. Otherwise, we are a paper tiger. Growl as much as we want but we have no bite and they know it. I know it."

Hi, this is jerry low. I read your blog since Saizen was a shitty counter which you covered 5,6 years ago.

Distraction aside, I urge you to use your writing skill and knowledge to help us win this thing. The apathy of the Singaporean investor is our hurdle. There are 12,636 unitholders in CDP and probably another 15,000 in CPF,SRS, nominees etc. There are many sad stories in this Shari'ah Compliant Sabana case, bearing in mind the profile of a REIT investor.

Please help to link/post your articles or views. Please also help to answer any questions a retail investor has. You do not even have to agree with me. But I know you also believe the manager must go. Do consider

Wisdom to tap on.

Disclaimer

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